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Wyo. named most tax-friendly state; N.Y. worst

According to Census data released this week, state and local tax revenue rose in the U.S, for the 13th quarter in a row. Tax Foundation finds some states much more tax friendly to businesses than others.

According to Census data released this week, state and local tax revenue rose in the U.S, for the 13th quarter in a row. With April 15 less than three weeks away, America's business owners will complete their personal taxes along with the rest of the country. According to the Tax Foundation, a think tank that advocates for lower taxes and a simpler tax code, some states remain much more tax friendly to businesses than others.

The Tax Foundation's 2013 State Business Tax Climate Index grades all 50 states on 118 different measures to reflect the favorability of their tax structure to businesses. The states that, according to the foundation, have the best business climates generally have lower tax rates, including lower personal and corporate income taxes, and less complicated tax codes. Wyoming has the best business tax climate in the country and New York the worst. Based on the Tax Foundation's report, these are the most and least tax-friendly states for business.

According to the report, low corporate tax rates are not the only issue that companies consider. Property taxes, for example, are also a major expense for businesses. Low income taxes are attractive to businesses because it is easier to attract employees to such states.

Simple tax structures are also important to companies. According to Scott Drenkard, economist at the Tax Foundation, one of the best ways states achieve this is by eliminating certain taxes altogether. Indeed, all but one of the states with the best tax climates for business do not levy a personal income tax, corporate tax or sales tax.

One exception is Utah. The state, which has the 10th most favorable business tax climate, levies every kind of tax measured by the report. However, it has flat rates for many of these, which the Tax Foundation considers more manageable. "Even though it has all the major taxes, it structures them in such a way that it is simple and transparent, and people and businesses understand it."

High tax rates and the presence of certain kinds of taxes are not the only components that make a state favorable for business. Drenkard notes that Delaware, which has the 14th best tax climate for business, "tends to get a lot of businesses that choose to incorporate there, even though there's a relatively high tax rate." In particular, it is easy to start a business in Delaware, and the state has a business-friendly regulation.

Not all agree that the Tax Foundation's portrayal of the business tax climate is a fair reflection of how attractive a state is to businesses. In an interview with 24/7 Wall St., Carl Davis, senior policy analyst at the Institute on Taxation and Economic Policy, explained that the assumption that higher tax rates are bad for business is unfair.

"Taxes exist to fund important government services, and so when a tax rate goes up, that revenue is put to various good uses that businesses benefit hugely from," Davis said. This includes, things like roads and bridges, an efficient court system, and "well-educated, trained employees with the skills they need to work effectively for their business."

In fact, some of the states with favorable climates, including Florida and Nevada, have lower taxes and, as a result, offer residents fewer government benefits. Others, like Wyoming, Montana and Alaska, have favorable tax climates for business, because they can afford to do so. These states are able to successfully raise cash through taxes on their thriving oil and gas industries. Consequently, despite the absence of many taxes, government benefits are often generous.

States with favorable business tax climates often have low unemployment. All but one of the 10 states with the best tax climates for business had a lower jobless rate in January than the national rate. On the other hand, four of the five states with the worst climates had high unemployment.

However, it would seem that the reason why the states with best tax climates for business have vibrant economies has less to do with their tax structure and more to do with abundant natural resources. In fact, five of the 10 states with the best taxes for business have among the biggest oil and natural gas reserves in the country.

Based on the Tax Foundation's 2013 State Business Tax Climate Index, 24/7 Wall St. reviewed the 10 states with the best and worst business tax environments. The tax rates and other data the Tax Foundation used to generate the rankings have changed slightly in a small number of cases. At the foundation's direction, 24/7 Wall St. reflected newer numbers when available. Unemployment rates are from the Bureau of Labor Statistics for January 2013. State debt and revenue figures are from the Tax Foundation for fiscal 2011, the most recent available year. Income, poverty, employment composition and state expenditure data are from the U.S. Census bureau, also from 2011.

Despite having the 10th-best business tax climate in the country, Maryland actually has a relatively high corporate tax rate. However, its rank for individual tax rates was the sixth-lowest of all states. Maryland's weak business climate may be driving some companies away, according the Tax Foundation. Northrop Grumman chose Virginia instead of Maryland due to the state's comparably attractive tax climate.

Iowa was rated by the Tax Foundation as having the second least favorable corporate taxes in the country, as it has a corporate income tax rate of 12% -- the highest in the nation. Despite these heavy taxes, Iowa collected just $82 per capita in taxes from corporations in 2011, vs. an average of $129 per capita in all states. Iowa benefited from one of the nation's lowest unemployment rates, which means more people earn a regular paycheck and have more money to spend -- potentially driving up tax revenue.

Wisconsin's income tax policy was the fifth-worst of all states for business, according to the Tax Foundation. Wisconsin collected $149 in corporate income taxes per capita, in the top third of all states. In addition, the state brought in $1,128 in individual income taxes per capita, the 10th highest of all states. The Tax Foundation lists Wisconsin as a state where job growth has been hampered by taxes. The state's unemployment rate, however, was lower than the national rate in January.

North Carolina ranked as the fourth worst state in the nation for the impact of sales tax policies on businesses. On the other hand, the state has the nation's highest excise tax on gasoline sales, at 37.5 cents per gallon. This is especially negative for businesses, according to the Tax Foundation, because gasoline is a necessity for many businesses. Additionally, the state ranks among the worst for its individual income tax policies.

Minnesota ranked seventh worst in both corporate taxes and individual income taxes. Minnesota collected $3,557 in per capita tax revenue, more than all but five states. The state collected $1,404 per capita from individual income taxes alone, more than all but four states. Minnesota is one of a handful of states across the country where lawmakers are weighing a shift toward higher sales taxes and away from personal income taxes. Yet state sales taxes are already higher than most states -- the 6.875% state sales tax rate is the seventh-highest in the nation.

Rhode Island is the worst state in the nation for unemployment insurance taxes, which are paid by employers to support the states' unemployment insurance programs. This remains especially problematic for business owners because of the state's high unemployment rate, which was 9.8% in January and tied with California for the highest in the nation. The state also received a low grade for its property tax policy from the Tax Foundation, which noted that Rhode Island had one of the highest effective property tax rates in the U.S., at 4.9% of income. In his January budget release, Rhode Island Gov. Lincoln Chafee proposed lowering the corporate income tax rate in his state from 9% to 7%.

Vermont ranked as one of the worst states for corporate, individual income and property taxes. The state's individual income taxes rated poorly because the tax rate paid by its highest income bracket is especially high at 8.95%. This is important to many business owners running sole proprietorships and partnerships who pay taxes through individual income returns, according to the Tax Foundation. Vermont also had one of the highest property tax rates in the nation, at 5.27% of personal income. The state recently voted to raise millions of dollars through new taxes and is expected to increase taxes on gasoline to 33.6 cents per gallon, while raising income taxes for high earners.

California ranked lower than all other states except for New York in terms of individual income tax policy. In addition, the state ranked sixth from the bottom in terms of its corporate tax policy. In November, voters approved a state sales tax hike as well as higher taxes on the state's wealthiest residents in order to prevent massive spending cuts for the state's public schools and universities. Despite having higher tax rates than most of the country, California doesn't have a problem keeping large employers in the state. Twelve of the Fortune 100 companies in the U.S. are located in California, many of them technology giants such as Apple, Google and Hewlett-Packard.

New Jersey scored near the bottom of all states in several different types of taxes. The state ranked second from the bottom in property taxes, third from the bottom in individual income taxes and fifth from the bottom in sales taxes. New Jersey Gov. Chris Christie proposed a 10% deduction to income taxes across-the-board in 2012, which would have been phased in over a three year period. However, the measure was defeated by Democratic opponents in the legislature. It used to be worse for New Jersey. The state was ranked in last place in 2012 and would have taken the bottom spot once again if legislation raising taxes on millionaires had not been defeated.

The Tax Foundation considers New York to have the worst business climate of all states. While the state actually ranked in the better half in terms of corporate taxes, its individual income tax policy was ranked the worst in the country. The state collected $1,864 in personal income taxes per capita in 2011, higher than all other states. In addition, the Tax Foundation considered the state's unemployment taxes and property tax policies among the most burdensome of all states. Nevertheless, 17 of the 2012 Fortune 100 companies are located in New York, with nine of these companies among the Fortune 50. Drenkard said that despite the tax burden, many companies, especially large ones, are attracted to New York due to such factors as its large population and proximity to Wall Street.

Unlike most of the states with high marks for their business climate, Utah levies taxes in all five areas measured by the Tax Foundation. However, Drenkard pointed out that Utah received good marks for business because its taxes were not especially high in any one particular area. The state ranked third best in terms of property taxes and fifth best in terms of corporate tax policy. The low taxes, along with a better-than-average educated workforce, has encouraged companies to continue to build a presence in the state. For instance, Goldman Sachs has been building up its operation in Salt Lake City within the past year, and it is becoming one of the company's largest operations worldwide. Procter & Gamble has also built a presence in the state due to low taxes.

Texas is one of just seven states that have no individual income tax, all of which are among the most-friendly toward business. Outside of the individual income tax, however, Texas was rated poorly for many of its tax policies, including corporate taxes where it was rated 13th-worst. One reason for this low rank is that Texas taxes business es with a gross receipts tax -- in which company sales, rather than profits, are taxed. As of January, Texas was one of just five states to broadly tax all businesses using such a measure.

Montana is one of just five states that don't have a sales tax at either the state or the local level. In addition, the state has some of the lowest property taxes in the entire country. The state's effective property tax rate -- 0.72% of median home value in 2011 -- was lower than the 1.12% average rate across the country. Furthermore, while far from receiving the best ranks, the state's individual income and corporate taxes are more favorable than half of all states. Unlike some states, Montana has a flat corporate income tax, with all businesses paying 6.75% of all profits. Despite a pro-business tax climate, there are no Fortune 500 companies based in Montana.

New Hampshire is one of just two states, along with Tennessee, that restrict personal income taxes to just interest and dividends. Additionally, New Hampshire is one of just five states that have no state-level sales tax. Partly because of this, New Hampshire ranked ninth for individual income policy and first for sales tax policy on the Tax Foundation's business climate index. However, the state had the nation's highest property tax rate as a percent of income as of July 2012, at 5.68% of residents' income, and it earned one of the worst scores in the U.S. for its property tax policy.

Washington ranked high on the list largely because it doesn't have any individual income tax. The state's other tax policies generally received mediocre ratings, with its sales tax policy rated the third worst in the nation by the Tax Foundation. As of January, the state's sales tax rate was 6.5%, 10th highest in the nation. And when including the average local sales tax paid, the state has the fourth-highest sales tax, at 8.86%. Other policies, such as high excise taxes on different products, also lowered its rank. The state had the fifth-highest excise tax on cigarettes in January at $3.03 a pack. Because of these policies, Washington was named by the Institute on Taxation and Economic Policy as having the most regressive state tax structure in the nation -- meaning the poor pay far more of their income than the wealthy.

Florida has no individual income tax. In addition, the state has a 5.5% flat corporate tax rate, lower than most states that levy one. Since Gov. Rick Scott took office in January 2011, he has worked to eliminate the corporate tax rate altogether. Although unsuccessful, he has managed to allow corporations to deduct up to $50,000 in profits from taxes, meaning that half of the state's corporations pay no tax at all. The state collected just $1,718 in taxes per capita in 2011, lower than all but seven other states. More than a quarter of the state's total revenue haul came from state sales taxes. The state brought in $1,021 in sales tax revenue per capita in 2011, higher than all but five states.

Alaska is one of only seven states in the U.S. that does not collect income taxes. Despite this, Alaska collected $17,630 in total revenue per capita, by far higher than any other state in the country. Most of Alaska's revenue is from taxes on oil and gas. The economy in Alaska has been performing considerably better than most states. The state's unemployment rate of 6.7% in January 2013 was considerably lower than the 7.9% across the country.

Nevada doesn't collect any individual or corporate income taxes. To make up for this, the state has a sales tax rate of 6.85%, the eighth-highest of all states. In addition, a sizable chunk of the state's revenue comes from taxes on gambling revenue. Tax revenue in January 2013 was down by more than 11% compared with the same month in 2012. A ballot initiative raising the state's gaming tax from 6.75% to 9% was devised in 2012. However, the measure never made it to the voters because a judge found the tax inadequately explained what it would accomplish.

South Dakota is one of the seven states without an individual income tax. In addition, the state only collected $19 per capita of corporate income tax in 2011, lower than all other states excluding the four states that do not collect corporate taxes. Because of these low taxes, the state only collected $1,682 per capita in 2011, lower than all but two other states. More than half of that money was collected in the form of sales taxes. In 2011, the state collected $985 in sales tax revenue per capita, the eighth-highest of all states. In January 2013, South Dakota had an unemployment rate of just 4.4%, lower than all states except for North Dakota and Nebraska.

Wyoming is the highest-rated state in the nation for business tax policy. Like other states with strong business tax climates, it benefits from the absence of any individual income tax. Like Nevada and South Dakota, which ranked just behind Wyoming for the quality of their business tax climate, Wyoming has neither corporate income tax nor gross receipts tax. But while other states that did not tax income choose instead to tax sales heavily, Wyoming does not. As of January, its state sales tax rate was just 4%, one of the lowest of any state with such a tax. Including the average local sales tax, consumers paid an effective sales tax rate of just 5.3% on purchases, among the lowest in the nation.

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The five states with the lowest state and local tax burden:5. Wyoming residents pay 7.8% of their income on state and local taxes. The state collects $3.48 billion (5th lowest) in total state and local taxes. Residents pay 33.1% (2nd lowest) of the total taxes and non-residents pay 66.9% (2nd highest). The oil and gas industry provided $1.9 billion to state coffers in fiscal 2010.
Photo of Missouri River in Helena, Mont., by Matt Volz, AP

4. Louisiana residents pay 7.8% of their income to state and local taxes. The state collects $16.15 billion (24th highest) in total state and local taxes. Residents pay 53.1% (4th lowest) of the total taxes and non-residents pay 49.6% (4th highest).
Photo of Bourbon Street in New Orleans by Rusty Costanza, Getty Images

3. Tennessee residents pay 7.7% of their income to state and local taxes. The state collects $18.24 billion (23rd highest) in total state and local taxes. Residents pay 63.2% (13th lowest) of the total taxes and non-residents pay 36.8% (13th highest).
Photo of the Grand Ole Opry by Chris Hollo

2. South Dakota residents pay 7.6% of their income to state and local taxes. The state collects $2.58 billion (the lowest) in total state and local taxes. Residents pay 57.0% (8th lowest) of the total taxes and non-residents pay 43.0% (8th highest).
Photo of Mt.Rushmore National Monument in South Dakota

1. Alaska residents pay just 7.0% of their income to state and local taxes, the lowest in the nation. The state collects $6.17 billion (11th lowest) in total state and local taxes. Residents pay 24.5% (the lowest) of the total taxes and non-residents pay 75.5% (the highest).Oil taxes made up the vast majority of the state's revenue collection, amounting to $6.2 billion in 2010.
Photo of Mendenhall Lake, in Juneau, Alaska, by Becky Bohrer, AP

The five states with the highest state and local tax burden:5. Wisconsin residents pay 11.1% of their income on state and local taxes. The state collects $24.39 billion (16th highest) in total state and local taxes. Residents pay 77.7% (8th highest) of the total taxes and non-residents pay 22.3% (8th lowest).
Photo of Green Bay Packers fans by Marcio Jose Sanchez, AP

3. Connecticut residents pay 12.3% of their income on state and local taxes. The state collects $21.41 billion (19th highest) in total state and local taxes. Residents pay 80.7% (4th highest) of the total taxes and non-residents pay 19.3% (4th lowest).
Photo of Yale University in New Haven, Conn., by Bob Child, AP

2. New Jersey residents pay 12.4% of their income on state and local taxes. The state collects $51.10 billion (7th highest) in total state and local taxes. Residents pay 81.4% (3rd highest) of the total taxes and non-residents pay 18.6% (3rd lowest).
Photo of the boardwalk in Atlantic City, N.J., by Eileen Blass, USA TODAY

1. New York residents pay 12.8% of their income on state and local taxes, the highest int he nation in 2010. The state collects $136.24 billion (2nd highest) in total state and local taxes. Residents pay 73.3% (19th highest) of the total taxes and non-residents pay 26.7% (19th lowest).
Photo of New York City skyline by Afton Almaraz, Getty Images